Business law and the importance of debt financing

On behalf of Gusty A.E. Sunseri & Associates, P.C. posted in Business Law on Thursday, November 15, 2018.

Starting a business can be a tricky endeavor. Those who are successful in doing so can feel an enormous sense of pride, as they should, since this is a big accomplishment. However, business troubles don't end with the successful creation of a business. Instead, they are oftentimes just beginning. Knowing how to handle these matters in a way that protect your and your business's best interests is imperative to surviving in today's cutthroat business world.

One important issue to be familiar with is debt financing. Generally speaking, there are only two ways to raise capital to fund a business, whether it be for its initial creation or for ongoing operations. The first is through equity financing. Here, a company sells stocks and stockholders become owners of the company. While these stockholders have a financial interest in the company, they are not guaranteed their money back. In fact, if the company in question were to go bankrupt, shareholders would be the very last to receive a payout.

The other way to raise capital is through debt financing. Here, a business sells debt products like notes or bonds. Investors who purchase these products are essentially lenders. Debt financing agreements usually include a specific date by which the debt must be repaid with interest. If the business goes bankrupt, then these investors have a higher priority, which means they will be much more likely to recover their investment.

Debt financing can be enormously complicated, especially if you want to be thorough to ensure that you are doing it in a way that protects you and your business. This is why if you are considering ways to finance your startup or raise capital for ongoing expenses and growth, it may be best to speak to a financial advisor and a business law attorney who can help ensure that any debt financing agreements are fair and favorable to your position.

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